Glossary (6)

  Glossary

Puttable bond—bond with embedded put features allowing holders to sell the bonds back to the issuer at a specified price and time (see callable bond) 

Recapitalization—financial restructuring of a company whereby the company borrows against its assets and distributes the proceeds to shareholders 

Relative-performance orientation—the tendency to evaluate investment results by comparing one’s investment performance with that of the market as a whole 

Return—potential gain 

Rights offering—a financing technique whereby a company issues to its shareholders the preemptive right to purchase new stock (or bonds) in the company or occasionally in a subsidiary company 

Risk—amount and probability of potential loss 

Risk arbitrage—a specialized area involving investment in far-from-risk-free takeovers as well as spinoffs, liquidations, and other extraordinary corporate transactions 

Secured debt—debt backed by a security interest in specific assets 

Security—a marketable piece of paper representing the fractional ownership of a business or loan to a business or government entity 

Self-tender—an offer by a company to repurchase its own securities 

Senior-debt security—security with the highest priority in the hierarchy of a company’s capital structure 

Sensitivity analysis—a method of ascertaining the sensitivity of business value to small changes in the assumptions made by investors 

Share buybacks—corporate stock repurchases 

Shareholder’s (owner’s) equity—the residual after liabilities are subtracted from assets 

Short-selling—the sale of a borrowed security (see going long) 

Short-term relative-performance derby—manifestation of the tendency by institutional investors to measure investment results, not against an absolute standard, but against broad stock market indices resulting in an often speculative orientation 

Sinking fund—obligation of a company to periodically retire part of a bond issue prior to maturity 

Speculation—an asset having no underlying economics and throwing off no cash flow to the benefit of its owner (see investment) 

Spinoff—the distribution of the shares of a subsidiary company to the shareholders of the parent company 

Stock—a marketable piece of paper representing the fractional ownership of an underlying business 

Stock index Futures—contracts for the future delivery of a market basket of stocks 

Stock market proxy—estimate of the price at which a company, or its subsidiaries considered separately, would trade in the stock market 

Subordinated-debt security - security with a secondary priority in the hierarchy of a company’s capital structure 

Tactical-asset allocation—computer program designed to indicate whether stocks or bonds are a better buy 

Takeover multiple— multiple of earnings, cash flow, or revenues paid to acquire a company 

Tangible asset—an asset physically in existence

Glossary (4)

 Glossary

Inside information—information unavailable to the public, upon which it is illegal to base transactions 

Institutional investors —money managers, pension fund managers, and managers of mutual funds 

Intangible asset—an asset without physical presence; examples include intellectual property rights (patents) or going-concern value (goodwill) 

Interest—payment for the use of borrowed money 

Interest-coverage ratio—the ratio of pretax earnings to interest expense 

Interest-only mortgage security (IO)—interest payments stripped from a pool of mortgages which, for a given change in interest rates, fluctuates in value inversely to conventional mortgages (see principal-only mortgage security) 

Interest rate reset—a promise made by an issuer to adjust the coupon on a bond at a specified future date in order to cause it to trade at a predetermined price 

Internal rate of return (IRR)—calculation of the rate of return of an investment that assumes reinvestment of cash flows at the same rate of return the investment itself offers 

Investment—an asset purchased to provide a return; investments, in contrast to speculations, eventually generate cash flow for the benefit of the owners (see speculation) 

Investment banking—profession involving raising capital for companies as well as underwriting and trading securities, arranging for the purchase and sale of entire companies, providing financial advice, and opining on the fairness of specific transactions 

Investment grade—fixed income security rated BBB or higher 

Junk bond - fixed-income security rated below investment grade 

Leveraged buyout (LBO)—acquisition of a business by an investor group relying heavily on debt financing 

Liability—a debt or other obligation to pay 

Liquidating distribution—cash or securities distributed to shareholders by a company in the process of liquidation 

Liquidating trust—an entity established to complete a corporate liquidation 

Liquidation value—the expected proceeds if the assets of a company were sold off, but not as part of an ongoing enterprise 

Liquidity—having ample cash on hand 

Liquid security—a security that trades frequently and within a narrow spread between the bid and asked prices 

Making a market—acting as a securities dealer by simultaneously bidding for and offering a security 

Margin of safety—investing at considerable discounts from underlying value, an individual provides himself or herself room for imprecision, bad luck, or analytical error (i.e., a “margin of safety”) while avoiding sizable losses 

Market price—the price of the most recent transaction in a company’s publicly traded stock or bonds 

Maturity—the date on which the face value of a debt security is due and payable 

Merchant banking—an activity whereby Wall Street firms commit their own capital while acting as principal in investment banking transactions 

Merger—a combination of two corporations into one 

Mutual fund—a pooled investment portfolio managed by professional investors 

Net asset value (NAV)—the per share value of a mutual fund calculated by dividing the total market value of assets by the number of shares outstanding 

Net-net working capital—net working capital less all long-term liabilities 

Glossary (2)

 Glossary 

Catalyst—an internally or externally instigated corporate event that results in security holders realizing some or all of a company’s underlying value 

Chapter 11—a section of the federal bankruptcy code whereby a debtor is reorganized as a going concern rather than liquidated (see bankruptcy) 

Closed-end mutual fund—mutual fund having a fixed number of outstanding shares that trade based on supply and demand at prices not necessarily equal to underlying net asset value (see open-end mutual fund) 

Collateralized bond obligation (CBO)—diversified investment pools of junk bonds that issue their own securities, usually in several tranches, each of which has risk and return characteristics that differ from those of the underlying junk bonds themselves 

Commercial paper—short-term loans from institutional investors to businesses 

Commission—a charge for transacting in securities 

Complex securities—securities with unusual cash flow characteristics 

Contingent-value rights—tradable rights that are redeemable for cash if a stock fails to reach specified price levels 

Convertible arbitrage—arbitrage transactions designed to take advantage of price discrepancies between convertible securities and the securities into which they are convertible 

Convertible bonds—bonds that can be exchanged for common stock or other assets of a company at a specified price 

Coupon—the specified interest payment on a bond expressed as a percentage 

Covered-call writing—the practice of purchasing common stocks and then selling call options against them 

Cram-down security—security distributed in a merger transaction, not sold by an underwriter 

Credit cycle—the ebb and flow in the availability of credit 

Debtor-in-possession (DIP) financing—loan to a bankrupt company operating in Chapter 11 

Debt-to-equity ratio—the ratio of a company’s outstanding debt to the book value of its equity; a measure of a company’s financial leverage 

Default—the status of a company that fails to make an interest or principal payment on a debt security on the required date 

Default rate of junk bonds—calculated by many junk-band-market participants as the dollar volume of junk-bond defaults occurring in a particular year divided by the total volume of junk bonds outstanding 

Depreciation—an accounting procedure by which long-lived assets are capitalized and then expensed over time 

Discount rate—the rate of interest that would make an investor indifferent between present and future dollars 

Diversification—ownership of many rather than a small number of securities; the goal of diversification is to limit the risk of company-specific events on one’s portfolio as a whole 

Dividend—cash distributed by a company to its shareholders out of after-tax earnings 

Earnings before interest, taxes, depreciation, and amortization (EBITDA)—a nonsensical number thought by some investors to represent the cash flow of a business 

Earnings per share—a company’s after-tax earnings divided by the total number of shares outstanding

A visual glossary of corporate finance

http://glossary.income-outcome.com/